Buy Now, Deduct Entire Equipment Purchase in 2019
Are you considering a major fixed equipment purchase soon? Thanks to Section 179, there’s never been a better time to purchase capital equipment. If you install a new compressed air system in December, you could possibly deduct 100% of your purchase for the 2019 tax year.
Here’s how the Section 179 deduction works and how businesses can benefit. Note: We are not your tax advisor. Please check with your accountant to make sure your purchase qualifies.
What Is Section 179—And Why Should You Care?
Section 179 of the U.S. Tax Code allows businesses to deduct the full purchase price of qualifying equipment or software purchased or financed during that tax year. It was put in place by the U.S. government to encourage businesses to invest in equipment, software and other tangible assets. (Such as, perhaps, a compressed air system…) While all businesses can take advantage of Section 179, its intent is to make it easier for small businesses to make large capital purchases to support their continued growth.
Tangible assets are usually deducted annually through depreciation. So if you purchased a $1,000,000 piece of equipment with a service life of ten years, you would deduct 10% of the purchase price ($100,000) each year over the next ten tax years.
Under Section 179, you can deduct the entire $1,000,000 off of your gross revenue in the same year you make the purchase. This can be a tremendous financial advantage for many businesses when tax time rolls around. If your business is taxed at 25%, deducting the $1,000,000 in year one will take $250,000 off your tax bill in April. It’s like getting a 25% discount on your equipment purchase!
What Are the Limits to Section 179?
There are three important limits to keep in mind when considering the Section 179 deduction.
- The deduction limit is $1,000,000 for tax year 2019. That means that businesses can deduct up to $1,000,000 for equipment purchased or financed and placed into service during 2019.
- You cannot deduct more than your company’s aggregate income from all business activities for the tax year. If the aggregate income for your business is less than $1,000,000 for 2019, you can deduct up to 100% of your income, but no more.
- The spending cap on equipment purchases is $2,500,000. If you purchase more than $2,500,000 in equipment in 2019, the amount you are allowed to deduct under Section 179 is reduced on a dollar-for-dollar basis for each dollar spent over $2.5 million. Businesses spending more than $3.5 million do not qualify for the Section 179 deduction. This ensures that the deduction is targeted to the small businesses it is designed to help.
If you spend more than $1,000,000, but less than the $2,500,000 spending cap, you may also qualify for bonus depreciation for the amount spent in excess of $1,000,000. Ask your accountant for details to see if you qualify.
How Do I Take advantage of the Section 179 Deduction?
Qualifying purchases must be placed into service during the 2019 tax year. Equipment can be paid for outright or financed.
What’s a qualifying purchase? According to the IRS, the deduction is meant for tangible property and computer software acquired “for use in the active conduct of a trade or business.” Under recent amendments, certain kinds of real estate (“real property”) now also qualify.
“Tangible property” is defined as equipment or assets that are traditionally depreciated over time under Section 168 of the tax code. For most businesses using compressed air, this will include the purchase of a new compressed air system. Check with your accountant to be sure this is true for you.
These deductions won’t last forever—now is the time to buy! Equipment must be “put into service” this calendar year to qualify, so if you’re in the market for a new compressed air system, contact us right away to make sure you meet the December 31 deadline.